TCS reported revenue decline in 1Q, primarily due to the ramp-down in BSNL deal. Barring India, the company posted a disappointing 0.5% QoQ revenue decline. The weakness is attributable to the cautious discretionary spending in international markets. Clients are taking longer to finalize decisions, with near-term demand staying soft due to macro volatility and a sharper focus on return-driven investments. Management expects a rebound in FY26 growth, banking on i) visibility from robust 2HFY25 TCV numbers, despite no new mega deal wins (exceeded guided range of USD 7-9bn), ii) signs of reviving discretionary spends in the BFSI and retail verticals, iii) signs of recovery in the US financial services vertical, and iv) positive bias in clients’ CY25 IT budgets. Management believes the medium-term drivers for technology spend are intact and is upbeat on revenue growth for FY26 versus FY25. We have revised our USD revenue CAGR estimate for FY25–27E downward from 6.4% to 4.6%, factoring in near-term softness and a cautious demand outlook. EPS estimates for FY26E/FY27E have been trimmed by 1.9%/2.7%, while EBIT margin assumptions remain largely unchanged. Accordingly, we lower our target price to ₹3,908 (from ₹4,017), based on an unchanged 25x FY27E EPS. At 23.6x 1-year forward earnings, TCS trades at a 4% discount to its 10- year average—offering a favorable entry point. Key risks: 1) Abrupt exit/s from the leadership team, 2) pressure on client discretionary spend sustaining in FY26/FY27, 3) non-encouraging outcomes of cost-saving programs.
UK, Europe, APAC, and MEA markets showed growth
For 1Q, TCS reported YoY decline of 3.1% in CC, 1.1% in USD and growth of 1.3% in INR terms. UK, continental Europe, APAC (Asia Pacific), and MEA (Middle East Asia) markets drove the growth, while India (BSNL deal), North America and LATM (Latin America) remained weak during the quarter. While the BFSI, technology, and energy & utilities verticals along with retail showed growth, manufacturing, healthcare, regional markets, and communications were weak during 1Q. TCS recorded total contract value (TCV) of USD 9.4bn in 1Q, marginally exceeding its guided range of USD 7-9bn. This provides revenue visibility for FY26, given its strong order book, despite no mega deals signed recently.
EBIT margin grew sequentially
EBIT margin grew 30bps QoQ to 24.5%, mainly due to lower third-party costs and currency tailwinds. TCS aims to improve operating leverage in Q2 by enhancing utilization (which declined this quarter), boosting productivity, and optimizing the employee pyramid.
Valuation & outlook
At 23.6x 1-year forward multiple, TCS trades at a 4% discount to its average 10-year historical valuation. Our TP of INR 3,908 (vs INR 4,017 earlier) is based on 25x (unchanged) FY27E EPS. TCS has consistently gained market share across tech shifts over the years, backed by a diversified service mix, deep client trust, and strong domain expertise. We see it as a key partner in clients’ cost takeout and digital transformation efforts. Maintain BUY.